Chit Chat Stocks - Moneygram International (MGI) with Luis Sanchez

Episode Date: August 26, 2021

We are joined by Luis Sanchez, the founder of LVS Advisory. We discuss Moneygram, which is a money transfer company headquartered in Dallas, Texas. Luis brings his expert knowledge of Moneygram for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Luis's work? Follow him on Twitter: https://twitter.com/LuisVSanchez777?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Discovery | (3:16) The Business | (8:02) Further Questions | (35:41) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive. Today, we have Luis Sanchez on the show. We've had him on before. He's kind of a friend of ours. We speak to him occasionally and get a little Twitter DM group chat going. But one of the companies that he wanted to talk about was MoneyGram. So that's who we talk about today. Any highlights, favorite parts of the interview? Yeah. So if you're looking at this company, you got to definitely look at the different parts of the business. So they have the legacy business, which is very similar to a Western Union, if you know what that business does, remittance payments, but they're transferring it to, well, they're not transferring it. They have both, but they have a fast growing online

DDC business. He explains it very well, but the industry is very under followed. It is the remittance payments, which is basically if you're an immigrant in a country and you need to send something to another country, it is costly and you have to go through the compliance and all that type of stuff. And it's a really big business. It's I think a trillion dollars in spend projected will be hit at some point in annual spend. Really big industry. Yeah. Industry. Not on MoneyGram itself, but hopefully someday. But yeah, they have a lot of different stuff. Interesting history. We talk about their debt, valuation, all the good stuff.

It was awesome. Okay. And before we get to the show, we got to talk about our friend's quarter. This is our investor relations in your pocket. You can get anything on there. It's 100% free. I was using it the other day. It really is the easiest place to listen to conference calls. And it's also got transcripts so you can pull it up on the iPad if you use that. Just really nice to have. They include companies from 12 markets today. They also have it on Android, which Brett is, I think it's been out for what, two months? It's been, yeah. Yeah. Android's, it's good. And apparently they have a lot more coming before the end of the year. So make sure to follow them on Twitter

at quarter underscore app, Q-U-A-R-T-R underscore A-P-P. No E. So it's our friends at Quarter. Without further ado, let's get to the show. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome to our deep dive show. Today, we're welcomed by Luis Sanchez. He's been on the

show before, but I think it's been, what, three months since we last spoke, something around there? Three, four months. If you want to, if you know anything about Avid technology, we did a show on that back in, I believe it was March or April. So listen to that if you're interested in that company, but yeah. But other than that, how have you been? How's LDS? Hey, hey guys, thanks for having me back. I really enjoyed chatting with you guys the first time and talking about one of my favorite stocks avid and look forward to talking about one of my favorite stocks today which is money gram um yeah we uh and we'll get into it a little bit but how'd you even come across money gram and kind of how long have you followed it yeah you know

let me actually turn the question around on you guys which is like what do you guys know about money gram and like have you guys used the product before i've not i know what western union is. And I know a lot of people know about Western Union because that's kind of like the one that people reference when they're talking about this type of stuff. But I had not heard of MoneyGram, but I do know it's kind of a Western Union equivalent. Have you used Western Union before? I have not. I have not used Western Union. I saw a MoneyGram store in Mexico when I visited, didn't think much of it until

you sent us your write-up on it. So then I was like, oh, then it kind of clicked for me. All right. So this is actually one of the things that I find really fascinating about MoneyGram from like an investment standpoint is the actual product itself. They serve like immigrants sending remittances. And this is like, if you think about who the consumer base is, it's as far away from like your typical Wall Street investor, as you could pretty much imagine. which in my opinion like leads to a company like money gram more easily being misunderstood or mispriced so i just think that's an interesting kind of uh thing to think about here but um the way that i found out about money gram is um you know i've kind of i've covered payments for several years and i've been somewhat aware of money gram because like i i've in the past uh

we've owned Visa, we've owned companies like Adyen, we currently own PayPal. And like, you know, PayPal has a competing product. They have something called Zoom. Visa, MoneyGram, and Western Union are really big early adopters of a Visa technology called Visa Direct, which is a push pay technology. So I was aware of MoneyGram just given that I was familiar with the payment stack and just covered payments. But as an investment, I didn't really get interested into MoneyGram until a friend of mine who works for a credit hedge fund pitched it to me last year as a debt investment. And his pitch to me was basically that at the time, MoneyGram had a different capital structure. It had high-yield bonds,

which yielded double-digit, I call it 12%, 13%, 14%. So very high-yield debt, very speculative debt investment. And his whole thesis was that basically the debt market had MoneyGram wrong, that MoneyGram's core business was a lot more stable than people thought it was. There were some really interesting catalysts that could structurally improve MoneyGram from a debt investment perspective. And he believed that MoneyGram's debt would trade for like a single digit yield. And you know what? Like he was right. A few things happened in the last year and MoneyGram refinanced its debt. And now MoneyGram, it more than cut in half its debt interest. It was yielding, you know, north of 10% and now it yields a little bit more

than 5%. And, you know, I'm not much of a debt investor, but I do believe that sometimes the bond market can give us like really interesting insights into equity investing. And, you know, I not only was MoneyGram cheap, you know, in terms of like being a debt investment, but I also noticed that the stock was cheap. And I thought it was really interesting that the debt re-rated. And I thought it made me more interested into thinking about, okay, well, what could happen to the equity now that the cost of capital has changed so much? And some of the other things that my friend was telling me about the story improving on the debt side actually has a corollary into the equity side.

And just given the whole refi, I thought, okay, this is actually a really interesting setup. The story is a lot cleaner than it used to be. And that's kind of what got me down the road of researching MoneyGram as an equity investment. All right. And we're going to go into some of the details here, but can you give an overview of MoneyGram's business for people that don't know? Yeah, absolutely. So as I was mentioning above, MoneyGram is a cross-border money transfer business, and the primary use case for its products are helping immigrants send remittances. So, the remittance industry is a massive, massive industry that doesn't really get talked about enough, in my opinion. According to the World Bank, over $700 billion of money is sent in the form of remittances from developed countries to developing countries. that volume is like almost doubled in the last 10 years. And it's a growing industry. According

to the World Bank, they estimate that the volume of remittances is going to continue growing at a mid-single-digit rate over the next decade. And I had no idea. And what blew my mind even more was when I learned that there's dozens of countries where remittances, like receiving remittances, is like the most important component to their GDP. Like literally, there's some countries where remittances are like 30% of the country's GDP. So we're talking about countries like the Philippines or Nigeria, Mexico, all sorts of like smaller countries in Latin America or in the Pacific. It's a super, super important financial services industry that I just don't think gets enough attention. And I found it really fascinating. But more specifically into

MoneyGram, they have basically two major parts of their business. They have what I would refer to is like a legacy walk-in money transfer business where it's what you're referring to, Brett or Ryan, when you said that you saw a physical location. So they have over 400,000 physical locations where they use third-party partners such as CVS or Walgreens, or we're talking about like local bodegas

and hardware stores where people can walk in and send money. Now, you could think of these like physical locations as like franchises, right, where the MoneyGram will like split the revenue, the fee with the franchise that helps them send. um and and then on the receiving end it's it's kind of like this old school network effect business where you know people in these developing countries they also have physical locations where they can pick up the money in cash or you know in some cases they could pick it up in in their bank account the other side of money grants business is like a digital business which is something they started in 2018. And it's mostly in the form of a mobile app, where

if you download the mobile app, you can send money from your bank account. And the person receiving can either receive it digitally in like a bank account or a digital wallet, or they also have the option to pick it up at a local MoneyGram physical location. and um the difference you know the difference between the digital business and the retail business is that the digital business is like a direct-to-consumer um brand so there's no like third-party franchise that money gram is splitting the fee with and what ends up happening is that money gram has been able to grow this business at a very rapid rate partially because they pass along a lot of those savings so instead of instead of like paying a third party merchant to um

facilitate the money transfer money gram will just say you know what we'll actually we'll actually pass that along as savings to the user to incentivize folks to use our mobile app and and so to kind of like frame up the way that i see money gram as a business and like where how it's positioned today is they have this legacy business which is people walking into physical locations and sending money, that's about two thirds of the business today. And it generates a lot of cash flow. And the company is reinvesting that cash flow into this faster growing new digital business, which is growing at a double digit rate. And I think could actually be potentially worth a lot in the future. So are some of those physical locations

like trying to push MoneyGram online, this digital business that you talked about, the direct consumer or do you know or is it kind of just natural adoption of the product they're not so um you know and we could get into this later but one of the things that's really fascinating about the moneygram digital business is moneygram says that 80 percent of the customers on the digital side are completely new to moneygram so there's actually not that much cannibalization between the physical and the digital. And I believe that that has to do a lot with demographics. So the average person who uses a physical location tends to be older. They tend to be underbanked or unbanked, and maybe they're not as tech savvy. Whereas what MoneyGram is

finding with the digital users is they tend to be younger, more like Gen Z. They tend to be mobile first, a little bit more sophisticated in terms of having a bank account or already having access to financial services. And they just find using the MoneyGram app to be a really convenient way to send money. Interesting. And then you talked about Catalyst, especially in regards to the interest rate on their debt. But what was this recent regulatory settlement about? And then how can you kind of go into that a little bit and maybe how the company will benefit now that it's behind them? Yeah, absolutely. So, as we'll talk about later, MoneyGram is a cheap stock. And one of the reasons it's a cheap stock is because historically, it's had a lot of hair on

it. So, the biggest, I guess, hairiness, the biggest aspect of the hairiness is that for the last five years, they had a really intense regulatory issue that was recently dismissed. What happened was, back more than 10 years ago, some of the franchisees were indicted in a Department of Justice probe where they were found to be helping out in money laundering, or what ended up happening was the DOJ decided that they looked into the way that some of the volume on MoneyGram's network was being sent, and they just decided that MoneyGram's compliance standards weren't rigorous enough. So, about six years ago, the DOJ put MoneyGram under, they put a monitor on MoneyGram's business. And what that basically meant was that

there was someone from the DOJ kind of going through all of MoneyGram's compliance operations and just kind of providing very close scrutiny and oversight. And what happened is that over the past six years, MoneyGram has gone through this really intense transformation where they made a whole bunch of changes. They basically rebuilt their entire compliance structure. They completely replatformed their IT infrastructure, and they came out a lot leaner, actually. They cut hundreds of millions of dollars of expenses. They exited from Nigeria and China, which are the two highest risk, like compliance risk corridors out there. So, they decided to exit those two corridors and implement all sorts of other kinds of ID, like identification and compliance standards. So, MoneyGram was the first company in the industry to require showing an ID when you send money at a retail location, for example.

They have all sorts of other measures in place. And this all kind of came to a head last year where they finally met all of the requirements of this DOJ probe. And the judge dismissed the issue, I believe, officially in June of this year, so like three months ago. And now MoneyGram has had like the shackles of this really intense regulatory scrutiny lifted. And that was also why MoneyGram was able to refinance its debt. But so immediately after they had the regulatory probe dismissed, they went out and refinanced the debt. And that's one of the reasons why they were able to get less like less than half of the rate that they had before. And, you know, and now like one of the reasons why I think this is really important is because now not only so that the regulatory issues actually cost them a lot of money every year in the neighborhood of like 20 to 30 million dollars to maintain. this extra regulatory expense in dealing with the DOJ monitor, the refi had a lot of expense

reduction in terms of they were able to cut their interest rate in half. And if you just look at the combination of just the refi and the change in the compliance expenses, that's already 50% accretion to their free cash flow this year. That was more than $50 million of incremental free cash flow that they now have. So part of the thesis is that the company has a lot more flexibility, both financially, but actually also operationally, because now they don't have a compliance monitor second guessing everything they want to do. So they're now free to more aggressively and more freely invest in this digital business,

which I'm really excited about. Right. And you mentioned this before. What are the barriers to entry in this industry? And I guess, why is MoneyGram's position defensible? Yeah, great question. This is actually an industry with very high barriers to entry. And some of the more obvious ones would just be that in every single country that you're facilitating money transfer, you need to have a regulatory license. And the regulatory license for doing offline money transfer through, like, the traditional banking system and doing digital money transfers are two different licenses. So MoneyGram operates in 200 countries. They have licenses in every single one of those countries. And right now, they have the digital product enabled in about half of them, and they're working on getting 100% digitally connected. They actually are the furthest ahead if you look at the peer set.

So Western Union has a digital business, but Western Union's digital business is only in about 70 or 80 markets. So it kind of also shows you how MoneyGram is a little bit more focused on digital than its peers. But so having the regulatory licenses is one really big barrier. Another is they have that physical network that I mentioned. And MoneyGram has over 400,000 physical locations throughout the world. And it's really only one of three companies that has a global physical network.

The other two being Western Union, which has a slightly larger physical network. I think Western Union has somewhere between 500,000 and 600,000 physical locations. And then there's a third company called RIA, which has a similar network as MoneyGram and slightly smaller in terms of the volume of remittances they send out. So there's really only three global players that have not only all these regulatory licenses, but also have these physical locations. As I also mentioned, the compliance aspects of this business are pretty serious. and rigorous, right? If you think about money laundering rules and you think about what it takes for different regulators in different countries to be okay with you facilitating money going in and out, right? You can imagine that it takes some know-how and it

takes some experience to navigate that. When you get into the digital side, a big part of it is is every single country you have a different set of banks and a different set of procedures and so you basically have to rewire the rails a little bit differently so when you enter into a market like saudi arabia digitally there's different banks and when you're entering into germany and you know sending money from germany to saudi arabia is different from sending money from the us to saudi arabia so you get to this you get to this really interesting like network of networks where I believe MoneyGram says they facilitate like 30,000 different corridors, if you think about all the interconnections, right? You just can't do that overnight. Another thing is that

MoneyGram has been around since the early 1980s. So it has a brand that is really well known among the segments of the population that it serves, which I think is valuable. And I think those are the big, I think those are the big barriers. So what is, and maybe this is kind of a naive question, but what's to stop, is it those regulatory licenses? Like, let's say I wanted to Venmo my mom back in Brazil or something like that is, I don't know if Venmo's in Brazil, but what's, is it the regulatory licenses that's stopping them from entering that?

i thought i read somewhere that the cash app had like they have one they're uk the u.s but they have one connection i think i think it's a combination i think it's primarily um i think it's a combination of a lot of what i just said i think the biggest one is the regulatory aspect of it um it's just not you just can't get 200 regulatory licenses overnight so there's you know we can talk about the competitive landscape, but there's companies like Wise and Remitly who have started competing in the last 10 years. And I think Wise is only in like a couple of dozen countries at this point. They basically had to prioritize which markets they thought were worth entering earlier. But MoneyGram, they've just been around a lot longer. So they've had time to

familiarize themselves with all the local rules and procedures in all these different countries. The other thing is just that, like, even if you have the licenses, just being able to execute on just the compliance and also the rails, but the compliance aspect isn't trivial. So, like, traditional banks, a lot of traditional banks stay away from this segment of banking services because they view it as higher risk. And this is actually created, this is why someone who is banked may still want to use the MoneyGram app. Or this is actually why Wise, which primarily operates in Europe, has been able to grow so quickly. It's because Wise is taking market share from traditional banks that charge much higher fees and in a lot of cases just simply don't offer the service, right? so so if you think about like when a traditional bank is reluctant to do business in this area that has very specific and rigorous compliance standards and then think about like and then

you want to talk about a company like apple or square or paypal getting more serious into this you know like it's i think i think a lot of i think a lot of these tech companies and from the research that i've done a lot of them have explored looking into this but yeah like as you mentioned square is only facilitating us the uk i think right now venmo only does domestic they don't even do cross-border um and there's very and these are the reasons why because it's not easy there are serious barriers to entry and there's a lot of risk even if you've even if you've connected the countries and have the licenses there there's still risk that comes that comes with operating the business okay you want me to ask the next one yeah i guess

before we get to the ad break we want to talk about money gram online because that sounds sort of like the most promising product um i mean the core business is still there but what do you why do you like money gram online and then why do you think it'll grow over the next coming years yeah um great question so the biggest thing that i see is when i when i look at like the legacy money gram money transfer business the walk-in business that's not a very good business that's not a high quality business i would argue it's an average at best probably a below average business and what i what i did not mention up front is there's all sorts of like these regional players so for example there's a company called international money express which is public

which has a pretty good physical network in the southeast of the united states and they pretty much are specialized in sending money from the US to Latin America. And there's all sorts of smaller players that can establish a strong presence in a handful of corridors. And there's this aspect of working with third-party franchises. But what I really like about the digital business, I actually view the digital business that MoneyGram is building as a high-quality business for a couple of reasons. The first is just that establishing this direct to consumer relationship engenders MoneyGram with the ability to do a lot more things with that relationship. So, the first thing is they can and they do pass off the savings that come

with that direct to consumer relationship, right? So, I think that's really interesting. They also, because it's digital, they have this unique ability to kind of mix and match the physical network with the digital network. So, one thing that MoneyGram and Western Union are kind of unique is that you can send with the digital app, but have someone pick up at a physical location in cash. So, that's actually not something that Wise or like Remitly can do without some kind of third-party partnership. um another another thing is that the money in the digital world like it can get there faster um so it's cheaper it's faster it's simply a better product um having that dtc relationship also just gives moneygram access to that consumer so moneygram can now directly promote their product to the consumer via like a loyalty program they could send email promotions they

They can send in-app notifications. They can send text messages. What MoneyGram has found is that these digital customers are stickier. They're more recurring. They tend to use the app more frequently. They tend to actually send smaller dollar amounts, but they tend to send these dollar amounts more frequently. I think that's partially because they've reduced the cost of it.

So they tend to just be stickier, better customers. And what MoneyGram has said is that the average customer life, or at least what they found in the first couple of years of doing this, is the average customer LTV of a digital customer is anywhere between three to five times greater than their retail customer. And so my thesis is essentially that MoneyGram is upgrading the quality of its business to something that's much better because they have a better connection with the customer. The unit economics of digital, even with the reduced fees, are better, actually. And there's other things. It actually creates a lot more optionality in MoneyGram's business. So, for example, one of the things that MoneyGram is working on is creating a digital wallet. And they could actually start to do things that are more similar to what Wise is doing or what PayPal is doing.

They could start offering debit cards. They could start cross-selling additional features down the road once they kind of get this digital business at greater scale. Right, because Wise is doing the wallet where it's almost like a cross-border bank account with a card, right? That was kind of a big thing they launched recently. Yeah, so Wise is a really interesting business to look at, and it's actually serving a different segment of the market. So what MoneyGram would tell you is that the wise and the MoneyGram customers, they don't know each other. So MoneyGram is really focused on these like more remittance volumes from this immigrant

population, whereas wise is really focused on a more like white collar immigrant or someone who has a six figure income and they tend to be sending larger dollar amounts and they tend to be sending those dollar amounts between developed countries so with wise like a really big there's a lot of like cross like uh transatlantic volume with wise or like sending from like the uk to like germany or from like western europe to eastern europe is like what wise is really specialized in doing and when wise is serving that customer those customers tend to already be banked right so what wise is essentially doing is they're basically offering something that's cheaper and more efficient than like a traditional bank. And they're really chipping

away at like that, what they call the correspondent banking market. Whereas what MoneyGram is doing today, at least, is they're primarily serving this underbanked or unbanked population. And one of the things that MoneyGram could actually do down the road is they could maybe, they could potentially migrate up market and also start serving those like higher value customers too. It's actually something that the company is looking into that's a different target demographic than they're currently focused on, but it is something that is like embedded optionality in MoneyGram's digital business. Now, we haven't hit management at all. Is there anything important people should know about management and the ownership of this business

before investing? Yeah. So I really like management. I've been in communication with them off and on. And the company is led, the CEO, his name is Alex Holmes, and the CFO is Larry Angelilli. And they basically took helm around the time that the DOJ put MoneyGram under monitorship. So they weren't in charge before, like they weren't in charge when MoneyGram was potentially in violation of certain rules, but they did take charge after MoneyGram went into this, what I would call this regulatory hell. And what I've observed just studying the history of the company is Alex has just been, he's orchestrated this digital transformation and he's righted the ship through this process over the last six years. And when I look at all

the decisions Alex and Larry have made, if I was running the company, I would do the exact same thing as them. And so, I give them really high marks. And when I hear the way they talk about where they're taking the business, I feel really optimistic about it. So, essentially, the way that management's thinking about things is, as I was mentioning before, they're really harvesting the cashflow from that walk-in business. And they're just solely focused on growing this digital asset, which they see as the future of the industry. And I think they're going to get really good returns on their spend, right? Because if you think through the math that I just gave you about the higher customer LTVs and money grams, they have these natural competitive advantages

given their legacy moats. They're just really well-suited to attack this digital market and to be a winner. The other thing that I would mention that I really like about the digital business is I do a lot of work just looking at different kind of verticals of e-commerce. So one area that I've done a lot of work in is online gambling. Another area I've done a lot of work and it's e-commerce. And, you know, there's a very consistent trend when you see what happens when businesses go from like this offline to online transition, which is that there tends to be consolidation. There tends, you know, the internet tends to reward fewer scale players. And if you look at MoneyGram's offline market share, they're only doing, you know,

they're sub 10% market share in legacy money transfer. But where I see the company going in an online world is I think there will be one of the, you know, one of the three or four companies that are just because of how early and how aggressively they've invested in digital. They already are one of the three or four companies. And just given how much they continue to invest, I actually feel really strongly that they will have much higher market share in the digital world. And I really just credit all this to what, you know, basically what Alex and Larry have done just running the company for the last six years. They saw the trends ahead of time and they're still looking out ahead of the trends. If you hear about what they're saying about their

investments in digital wallet and trying to like go up market, I think they really are looking at this business in a way that I think is actually very innovative and very, very intelligent. How are they trying to attract customers? Is it just like just digital marketing or is there like a certain avenue that they're going down to get them? Yeah. It's, it's, it's, it's performance marketing. It's digital marketing. So one of the things that the company will tell you is that they used to do all sorts of offline advertisement. They used to do billboards.

They used to sponsor certain sporting events like golf, golf competitions and like regional basketball championships and that kind of thing. They've stopped spending money on all of the offline marketing and they've stopped trying to really grow the offline business. They're really just trying to maintain the offline business and they've shifted all of that spend to digital marketing and to digital partnerships. Okay. All right. Well, I think we're going to have a quick ad break and then we got some more questions on the second half. this episode is brought to you by La Quinta by Wyndham here you are miles from home and ready

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slash opportunities. All right. Welcome back in. The first thing I wanted to talk about was the valuation because that's something that kind of popped out at us, especially in your writing. What does the valuation look like today? And then why do you think this is going to make a good investment based on its valuation? Yeah. MoneyGram's valuation is striking. It's obviously cheap on traditional metrics and really on any kind of dimension you want to look at it. So, to kind of sum it up, and I was just looking at this ahead of this conversation so I had the right numbers, the company currently trades for seven times forward EBITDA. According to my model, 10 times forward free cash flow.

If you compare that to Western Union, Western Union trades for eight times EBITDA, so a slight discount to Western Union, not a huge discount. It trades at a discount to International Money Express, which also trades for an eight times EBITDA multiple. I mean, basically, when you look at this valuation, it's the kind of valuation that investors will give companies that are in decline, right? But based on my research, I actually see earnings growing. And there's a few different scenarios that this could play out. in the last year, MoneyGram Digital grew more than 50%. The first half of this year, MoneyGram Digital grew more than 60%. In all likelihood, MoneyGram Digital continues to grow at a double-digit rate for a long time, so five, 10 years, foreseeably. The retail business is

stable. It has had a couple of years of declines. The first half of this year, it actually comp positive and it's on par with where the business was at pre-pandemic. So in 2019, it had a similar first half of this year. So in a more bullish scenario where the digital business continues to grow and the retail business is fairly stable, flat, maybe slightly up, maybe slightly down. I think that free cash flow could actually double over the next five years. In a more conservative scenario where the retail business declines and maybe the digital business doesn't grow as aggressively, I don't see earnings declining. I still think earnings will probably grow a bit. But what I think is really interesting about the setup here

is I actually think that the market basically anticipates decline where there's a very good chance that the business doesn't decline. But like, okay, even if retail, even if the walk-in business declines, there's actually a really interesting scenario here because I think we'll get a lot of multiple expansion because the digital business is simply worth more. And And it's one thing for me to say that, but there's actually plenty of examples that – so Wise, as we mentioned, they went public this year. They went public through a direct listing in July. Wise is currently trading for 11 times revenue, forward revenue, and 45 times forward EBITDA. I was doing this math.

If you assume that MoneyGram's retail business is worth zero and you imply Wise's valuation to just MoneyGram's digital business, you've more than doubled your investment in MoneyGram. You could assume retail is worth zero. Wise isn't the best comp because it doesn't serve the exact same segment of the market that MoneyGram serves. So I think it's actually fair to say that Wise deserves to trade at a premium to MoneyGram based on the market positioning today. But there's actually a few other comps that you could look at. There's a private company called Remitly, which is rumored to be seeking an IPO later this year. And the rumor is they're seeking to go public at a $5 billion valuation. Based on the research that I've done, Remitly is actually doing less revenue than MoneyGram's digital business, yet MoneyGram's total market cap is less than a billion, and their total enterprise value is like a billion and a half.

Whereas, so if Remitly does go public at $5 billion, meanwhile, MoneyGram's digital business alone is doing greater volume than Remitly. It's really hard to argue that MoneyGram isn't anything but undervalued. And Remitly is a direct comp to MoneyGram Digital. They're targeting the exact same customer base. They compete against each other directly. So, well, I'll be really interested to see what happens when Remitly goes public and to see what valuation the market gives them. The way that I've thought about MoneyGram, like the framing that I have, is that MoneyGram's digital business is like this, in my opinion, if it was a private pure play, it would be a fintech unicorn. but it's in this legacy asset that is widely perceived to be this mature, declining business. And I've spoken to other investors who cover payments, and it's pretty clear that MoneyGram is not very well covered, I think because it's a smaller cap stock. And I think it's had so much hair over the years that people have just ignored it or they gave up on it. And they've missed this transformation that's occurred in the last year, especially in the past couple of months.

after the refinance and the regulatory issue changed. And I think I would hope, because I'm invested in the company, I would hope that I'm catching this business really early in the early innings of what I think could be a really interesting long-term story with the growth of this digital business. And it's funny because you can make the math work

even if you assume that the legacy business has a zero terminal value, but the legacy business is generating a ton of cashflow and it's actually given them a huge competitive advantage because they not only have this cashflow that they're using to their advantage, but they have this great legacy network. They have this legacy infrastructure that they can take advantage of. They have all these licenses. They have this brand. So the legacy business, I mean, it's probably not going to go to zero anytime soon. It's probably going to still be a cash positive business in 10 years. I don't know what the terminal value is like 20 years out of that business, but it certainly is benefiting the company to have this legacy

business. And it just appears that the way that investors are pricing this is investors almost seem to be giving it a negative value on the legacy business. So I think from a valuation perspective, MoneyGrams is very interesting to me. And I guess the last point I'd make is, you know, I mentioned the TAM earlier. This is like an industry where there's almost a trillion dollars of money being sent and the take rate is a couple of points, right? MoneyGram today has a market cap that's less than a billion. I think that although I wouldn't necessarily count on this, like this is a scenario where I think if everything goes right, It could be a serious multi-bagger here, right?

Just based on the size of the TAM and the current market positioning that the company has, and just given, in my opinion, a great job that management's doing. Right. It's not only undervalued now, but if they execute, it could turn into a compounder over the long term. One thing that would pop out to people when looking at the balance sheet is the debt and interest expenses. They're going to be high over the next few years.

You did mention the refinance. So I don't know if that's going to play into that changing. but how do you think about that in relation to valuing this business? Yeah. So as I mentioned, it's money gram is still a high yield debt issuer. They, they, they, the coupon on their, on their debt is about five and a quarter, I believe. So it's, it's, and, and previously it was greater than 10%. So the way that I view it is the capital structure is a lot more manageable.

There certainly is room for the company to continue to repay the debt and to achieve a higher credit rating and to continue to accrete to the bottom line. I think just my sense, given my conversations with management, is that they want to kind of balance, you know, achieving a better capital structure over time with making sure that they invest what they think they should invest into the growth opportunity. And that kind of makes sense to me. The company generates very healthy free cash flow at this point. You know, the interest expense really isn't a huge consideration. There certainly is room for them to continue to pay down the debt, but I'm not too worried about it today. Whereas like a year ago, I think whether

or not this was a credit risk or like a real potential, like default risk was, was a real scenario. I don't, I don't really see that anymore. What do the, I forgot to jot this question down for you, but what are the economics look like on MoneyGram online? Do you know how they've broken that out? Yeah, you broke, you did break, you did write about that. Can you maybe talk about the difference and how much it improves. Yeah. So, it's interesting and it could be a little tricky. But basically, the way to think about this is, let's say you're sending $100, right? Like you're a customer sending $100 and MoneyGram charges you a 5% fee to send that. So they charge you five bucks.

If you were in like a legacy, like walk-in, like you went into a CVS and did it, you would, you get charged five bucks. MoneyGram would give CVS a dollar. They would, and then they would retain $4. And I think the gross margin after considering both paying out to the franchise and also whatever the cost is of actually sending the money was roughly 45, 50%. So they're making about, you know, 50% gross margin on their legacy business. In the digital world, instead of giving, you know, they don't have to pay a third party.

So they'll only charge you like $4 or maybe $4.50. You know, they may keep a little bit more. And what happens, though, because they're not paying out that third party, they actually report a higher gross margin on that. So if instead of instead of paying out a dollar to CVS, they discounted by 50 cents. So now they're keeping 450. Right. And on that same transaction amount, basically, there is the same back end infrastructure. So like similar compliance costs, there are some incremental expenses in terms of like, well, now they need to pay for like the cost of sending money over a digital rail. right so there's some incremental cost to like pull money from a credit card and like put money onto a credit card but that is accounted for in um in like the way like they actually do

they if you if you go on their website and you like look at all the payment options you'll see that okay if you use ach they charge you less if you use credit card and you want the money quicker they'll charge you more so there is a little bit of price differentiation so they capture that. But generally speaking, they're able to earn a higher gross margin and the back end infrastructure is really similar, right? And then in terms of like the overhead and the marketing expense, as I mentioned, depending on the way that they run the business in the future, so historically they basically shifted that offline marketing spend to online. So the percentage of revenue has been really similar. But in the future, I wouldn't be surprised if

they increase the marketing spend. So maybe there was an increased variable expense, but if they earn a higher return on that spend, I think it could actually result in some higher incremental earnings down the road. Does that make sense? Yeah. That makes complete sense. Yeah. Are you going to ask about the B2B? Yeah. Yeah. Or no, we were running up on time. I think maybe a more fun one would be the acquisition potential or the floor on that. Would a fintech company, like you mentioned before, like Square and Wise, do you think they would want to acquire MoneyGram? Why or why not? And does that leave a floor on MoneyGram's, like a little bit of a margin, excuse me, a margin of safety on this investment? Yeah. So one of the things, and I don't know if

I've ever seen this before, but if you look out over the past five years, literally every single one of MoneyGram's competitors have tried to acquire it. So in 2017, MoneyGram agreed to sell itself to Ant Financial, so the financial affiliated with Alibaba. That deal was actually blocked by CFIUS because I guess US senators didn't feel comfortable selling a piece of critical financial infrastructure to China, which makes sense. In that same process, RIA, the parent company to RIA, which is called Euronet Financial, actually bid over the top of Alibaba's price. MoneyGram did not end up going with that offer. They actually walked away from it. And then last year, it was reported by Bloomberg that Western Union was interested

in acquiring MoneyGram. MoneyGram stock was too cheap, and it's come up since then. But I think it was smart not to sell to Western Union last year. Again, after this regulatory issue was settled and this refi happened, yet again, we have more acquisition rumors. Now, there's a crypto company. I think it's called Stellar. The Stellar Institute is being rumored to be interested in acquiring MoneyGram. And there's rumors that they're working with a private equity company in acquiring MoneyGram. So there's a lot of deal speculation on MoneyGram. And it makes sense because if you think about it, there's almost like this kind of valuation arbitrage here. If you believe the numbers that I gave you earlier, where if MoneyGram digital, just the

digital business alone was a private company, it would likely be worth a multiple of what it is now. And this is kind of classic. Maybe the private market is willing to pay more for something that the public market doesn't appreciate, kind of like classic Ben Graham. And I actually think that if the public market doesn't really start to appreciate the value of MoneyGram, eventually, I think that what could happen is that MoneyGram could sell itself for a valuation that maybe better reflects what a strategic would value MoneyGram as. And then another really interesting thing is, you know, there's a lot of real interest in fintech from consumer internet companies, right? So we mentioned Square, PayPal, but there's also Apple Pay. Google has certain

financial products there's a few other companies that that do things that are tangential to um to money i mean there's obviously a whole bunch of other uh fintech unicorns out there you know almost too many to name and if you stripe addion stuff like that absolutely and if if you believe that like the the bear if you believe that this is like a really interesting or strategically important type category of financial service, and you also believe that it's really hard to get all the regulatory licenses, and maybe you find strategic value in having physical locations, or maybe you just find value in the brand or in the IT infrastructure that they've developed, it would actually make a ton of sense for a long

list of buyers to just buy MoneyGram because I think the replication costs, the cost that it would take, the cost and the time it would take to replicate what MoneyGram has built would be a lot greater than the $1.5 or $2 billion that you would need to acquire MoneyGram today. So I think it actually would make a lot of sense. I think there's a question of whether or not the management team would be willing to sell at the current price. They've kind of indicated that they think it could be worth a lot more and i tend to agree um but you know the other thing that just on this topic right there is this trend in fintech for consolidation and a few weeks ago we just had square announced they're requiring after pay for 30 billion dollars right and i would argue someone

who's done i've done a lot of research on bnpl buy now pay later i would argue that square could have probably replicated Afterpay for a fraction of what they paid, but it would actually cost Square a lot more money to try to replicate MoneyGram than what the current market cap, what MoneyGram is. So I think that's a really interesting dynamic. And the other thing is, you have companies like Wise, and there's another company called Revolut, which have started to build up these cross-border fintech with credit card businesses, which are legitimately start to challenge companies like PayPal and Square, especially in Europe. And if PayPal and Square feel like they're at some kind of disadvantage because they don't have really

good cross-border money transfer, you could really see them getting interested in an asset like MoneyGram, in my opinion. Would cryptocurrency be a threat? Because I think that's one of the big cases proponents of crypto have made is that it's the most frictionless way to transfer money across borders? Does that threaten MoneyGram's business at all? It's a really good question. I'm not going to claim that I for sure have the answer. It's something that I've thought a lot about and I will continue to think about. I'd say that there's the meme that Bitcoin fixes this, right? But if you actually look at what MoneyGram does, a lot of the value is in the compliance aspect of what they do is not just in the rails and cryptocurrency unless people actually start

consuming like actually start using bitcoin as a as a tender uh you know a currency of tender they're still going to have to at some point transfer that money back to like a traditional bank account and that doesn't escape the the aspect of you still need to have like these compliance procedures and policies and licenses in place, right? You still need to have some kind of proof that you've done some kind of anti-money laundering check. JPMorgan just isn't going to accept an unknown payment from a cryptocurrency wallet. So it doesn't actually fix that problem. There is a lot of really interesting debate over what the cost of crypto is today and what it could be. You know, today, crypto is not free. It's actually

more expensive to transfer money over these different crypto wallets than it is to transfer money over like a MoneyGram digital app. So that's something that we'll just have to continue to monitor. But I actually think that MoneyGram could actually, like crypto could actually be a huge opportunity for MoneyGram. And one of the reasons I say that is because MoneyGram has actually done a lot with cryptocurrency already so for a couple of years moneygram had a partnership with ripple xrp where moneygram was doing the back like the they were providing the infrastructure that was powering the ability to send xrp cross-border which it's really interesting that you know one of the best or most highly thought of crypto projects still needed moneygram to do like a lot

of this infrastructure as a service kind of thing in order to work. But as a part of that partnership, MoneyGram actually became the first company to facilitate cross-border crypto transactions at scale. So MoneyGram actually was the first to do it at scale. And unfortunately, MoneyGram had to terminate the ripple because ripple found itself in regulatory issue due to its ico that it did and moneygram had its own regulatory issues and it didn't want to conflate the issues so unfortunately they had to end that partnership however moneygram has recently partnered with a couple of newer cryptocurrency they have a couple of newer cryptocurrency partnerships that they actually announced post-dismissing their regulatory issue. One is a project that helps

convert cryptocurrency to help invest in gold through a cryptocurrency. Another is the ability to invest in Bitcoin through an ATM. So they have a couple of interesting cryptocurrency projects. I think you guys were hinting at MoneyGram has this nascent B2B operation. One of the things that MoneyGram is thinking about doing is doing what they did for Ripple, basically serving as the back-office infrastructure through APIs. Basically, MoneyGram has built, over the last six years, they've gone through this really intense digital transformation where they've built a very robust and efficient IT infrastructure, and now their Their infrastructure is very clean and it's all accessible with APIs, and they have this ability to open it up to third parties to use their APIs, to use their rails, basically, to use their compliance infrastructure, and to pay MoneyGram a fee to use that infrastructure.

It's not a big part of MoneyGram's business today, and it's probably not going to be a big part of MoneyGram's revenue and earnings in the near term, but it is just an example of something that could materialize down the road. maybe crypto is a good use case of that. Maybe MoneyGram could partner, you know, maybe MoneyGram could be the back office, you know, infrastructure as a service provider for something like Square, for example. Maybe that could be an interesting avenue or a use case for it too. But the other thing that's really important to highlight about what MoneyGram is doing on the B2B side is it's basically doing, MoneyGram, what they're doing on the B2B side is the definition of what a fintech company does. So the market clearly doesn't value MoneyGram as a fintech company today. But just if you look at the things that MoneyGram is working on,

where they're focused on, the types of products and services that they're introducing and rolling out, assuming that these things continue to gain traction, I think eventually the market will wake up to the fact that, oh, wow, MoneyGram actually is a fintech company. It's doing a lot of things that are unique, scalable, and are not easy to do and are not easy to replicate, we need to change the way we think about valuing this asset. All right. Well, I think we'll wrap up, right? We're coming up on time. Yeah. If we still have time. Sure. Okay. I guess, yeah. Last question. What could go wrong with this business? What's the biggest risk you see? I guess we talked about crypto, but outside of that, any risks that people should know about? For sure. So the biggest thing

that I worry about is, as I mentioned, cross-border money transfer, there is more compliance risk and the company has had its compliance issues in the past. Obviously, the company has done a lot to basically rebuild its entire compliance infrastructure. And I believe that MoneyGram actually has best-in-class compliance infrastructure in the industry. However, there's also a risk that something could happen in the future and there could be future compliance issues or just because of the nature of the industry i mean western union has had its fair share of compliance issues so in my opinion that's like a potential risk that's worth being aware of um i think another thing to think about is what like i i believe that the retail business will

be fairly stable in the future, and it generates a lot of cash flow. But to the extent that the retail business starts declining or declines faster than the market currently thinks it will decline, that could pressure MoneyGram. Personally, I don't think you need to assume the retail business is worth anything. I think all the value, in my opinion, is on the digital business. So maybe more important than looking at the trajectory of the retail business, I want to see what happens with the digital business, right? The digital business is currently growing at a really healthy rate. Right now, it's at about a $250 million per year run rate. I think it will be doing a much, much greater amount of volume in the future. However, if the growth in digital

doesn't pan out the way I think it could, that obviously will change what the value of this business is. Maybe the last thing that's worth mentioning, MoneyGram is a small cap stock. It's not the most liquid stock in the world. It has economic sensitivity. I think the stock's been very volatile recently. I think part of the reason why MoneyGram stock has been volatile is because people see, for example, what's going on with the COVID Delta variant. And in the short term, if we get a really bad flurry of cases with the Delta variant, that's going to definitely hold down the near-term potential of MoneyGram's business. Because if you think about who their core segment is, which are immigrants who are remitting money, immigrants tend to be over-indexed

to some of these fields like hospitality and restaurants, which would be negatively impacted by some more shutdowns. So I think there's some short-term risk around that. There's definitely some short-term risk around earnings volatility. I think the last thing I would mention, and this was covered on the earnings call, MoneyGram does have a large relationship with Walmart. I think right now it's about 8% of their revenue. And that's been a bit of a headwind for them because Walmart has been diversifying away from MoneyGram over time. And Walmart has been putting pressure on MoneyGram's fees in that channel. If you look at where MoneyGram was like five years ago, Walmart used to be like more than 20% of their business. So they very successfully

diversified away from Walmart as a customer. But in the short term, you know, if that 8% of revenue goes away or becomes 4%, it could be a headwind in the short term. But if I think about MoneyGram, like as a five or 10 year investment, you know, I'm really focused on that digital business? Can they continue to grow and scale that business? You know, is that business going to be as competitively advantaged as I think it is? If it isn't, then it's going to weigh on the terminal value. If it is, then I think this will be a great investment. Okay. I think that answers all our questions. For any listeners that want to get ahold of you, contact you, anything like that, what's the best place?

yeah um as you guys know i'm active on twitter um so if you just look up luis v sanchez um or you could go to my website lvsadvisory.com and you can find my information on there perfect and you can sign up for a commentary uh by plugging an email in there as well we just did that so uh without further ado i want to close it out so brett and i are financial advisors anything we say or discuss here on chit chat money is not formal you said are we are not are not, sorry, financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have securities or positions discussed in the securities in this podcast. I'm butchering my

words, but thanks again for listening. We'll see you next time.